Investment Ratios Issues - Math Problem Example

Through the Sharp ratio, we can say that S&P 500 has the highest risk premium return as compared to Portfolio X. Hence, here Portfolio X underperformed S&P 500.

As we can see from the equation used the Sharpe portfolio performance measure uses the standard deviation of returns as the measure of total risk, whereas Treynor’s performance measure uses beta (systematic risk). The Sharpe measure, therefore, evaluates the portfolio manager based on both rate of return performance and diversification whereas the Treynor’s evaluates the portfolio manager based on systematic risk.

No use of the universe of managers can’t overcome and the reason behind this is beta (systematic risk and volatility depend on the market sentiment and the use of the universe of managers can overcome the internal performance of any company but not the market risk as this risk can be diversified but can’t eliminate.

Yes this looks to be a good argument and the reason behind this is the APT theory mainly depends on three steps:
- Identification of factors,
- Estimating factor loadings of assets and,
- Estimating factor premia.

If anyone does it nicely he/she can identify a better stock for investment to make a lot of money. But this identification and estimation is itself a tough task.

If we talk about portfolio risk options trading looks a lot more versatile than futures trading and the main reason behind it is a profit in all directions can be created by using option strategies. But if we look at future trading it is single-directional that is the direction of money is directly proportional to the direction of the stock price.

So we can say that futures trading is one of the important risk management tools and at the same time a speculative technique whereas options trading involves a strategic investment on its own. Hence, we can say that both trading instruments can place themselves in every well-diversified portfolio for the investor.

As we can see from the graph here the x-axis represents the portfolio return and the y-axis represents the risk factor. A portfolio can’t be expected above this efficient frontier line. At the lower level, we can see that a low risk represents a lower return, medium risk medium return and high-risk high return.

Supportive argument: The manager's performance only reflects in the return of the portfolio, i.e. when the manager performs well the portfolio will also perform well. The main reason behind it is a manager can only find out all the relative risk for any particular stock and at the same time he/she can judge the return from that particular stock to get a well-performing portfolio. Hence if a manager has performed well in the investment indicates that he has great skill to judge the risk and return from that investment.

Contradicting argument: Investment performance depends on market risk factors Manager performance depends on investment for a particular year, but the market risk changes with the situation over time and hence we can’t judge a manager's performance from its past performances.